Opec-Plus Optimism Bolsters Crude Prices

Crude prices surged higher early on Thursday amid reports that Opec and its allies would increase production -- but only slightly. The prospective deal became less certain amid a last-minute objection, reportedly from the United Arab Emirates, but prices did not move much following the news. As the meeting got under way, sources reportedly told Reuters that there was a deal to lift production quotas and that incremental output would amount to fewer than 500,000 barrels per day to start. Oil had traded over $2 higher in early trading but retreated some later in the session as the US dollar hit three-month highs against a basket of other currencies. Analysts say a strong dollar tends to be bearish for crude, which is priced in greenbacks. In London, Brent crude for August delivery settled $1.22 higher at $75.84 per barrel, with the underlying dated Brent contract closing north of $76/bbl. In New York, September West Texas Intermediate (WTI) closed $1.76 higher at $75.23/bbl, while the September contract ended the session up $1.56 at $74.33/bbl. WTI was trading at its highest levels since late 2018, well before the start of the Covid-19 pandemic. In addition, according to analysis by technical trading firm Icap, WTI has breached a key resistance level around $74.45/bbl. "Complete this task and we will be plotting a course for $75.61/bbl, possibly even the $77/bbl neighborhood," said Icap’s Brian LaRose. Stage Is Set Market players had long said that Opec-plus had room to increase output without derailing oil’s journey higher. That’s in part because a deal between Iran and the US that would see the return of barrels from the Islamic republic remains elusive (OD Jun.28'21), but also because of a recovery in demand. The latter comes amid an aggressive vaccine rollout that has helped lift quarantine protocols as well as economic stimulus measures, and is expected to continue into the second half of the year. "As more people are vaccinated and the virus is tamed, mobility restrictions ought to be eased gradually all over the world," said Tamas Varga of oil brokerage PVM. "This will result in continuous expansion, which is a blessing for oil consumption. In other words, in the first half of the year the stage has been set for further improvement, and for economic and oil demand growth." The thinking is that a mild increase in supply from Opec-plus in the face of rising demand would ensure that stockdraws will continue and that the oil market will remain tight in the second half of the year. This is especially true given upstream developments outside of the Opec-plus bloc. Amid a historic rally in oil prices since the middle of last year, US crude production remains well below its pre-pandemic peak at around 11.1 million barrels per day (OD Jun.30'21). "Despite the surging prices and unlike the previous boom cycles, US shale producers have not responded by raising their output yet," noted Fawad Razaqzada of ThinkMarkets (OD Jun.28'21). "This is, in part, because investors have demanded better financial returns rather than production of more crude volume, as well as the fact that the focus has shifted to the production of more renewable energy than relying on fossil [fuels]." Frans Koster, New York